In 2007, two LLCs, RadLAX Gateway Hotel and RadLAX Gateway Deck, bought a Radisson Hotel and an adjacent lot at Los Angeles International Airport. Their goal was to renovate the hotel and build a parking garage on the lot next door. To finance the project, RadLAX took out a $142 million loan that was secured by a lien on all of its property, from Amalgamated Bank.
The renovations proved to be more expensive than anticipated, and within two years RadLAX was out of money. The company still owed more than $120 million on the loan, with more than $1 million in interest accruing every month. Out of options and with no other sources of money available, RadLAX declared bankruptcy under Chapter 11.
The Bankruptcy Act provides that a court should consider a cramdown plan fair and equitable under three circumstances: the debtor allows the secured creditor to retain its lien on the property and makes deferred payments; the debtor sells the property at auction, permitting the creditor to credit bid, taking amounts owed as an offset against the sale price; or the debtor sells the property, providing the secured creditor with the “indubitable equivalent” (usually cash) of what it is owed.
In addition to resolving the uncertainty of the circuit split, the Supreme Court’s decision in RadLAX is expected to bring greater liquidity to the market for secured credit. Knowing that credit bidding rights will be upheld makes it less risky for an investor to buy secured debt. More importantly, the decision gives potential lenders certainty that their rights will be upheld in the event of a bankruptcy and maximizes their potential for recouping their investment.